The Microsoft Dynamics Lodestar: Enterprise Software Become Microsoft’s Locus of Innovation

Over the ten years in which Microsoft has struggled to find a place for its Dynamics enterprise software products inside the company, the question of whether Microsoft should jettison the business  unit altogether has surfaced more than once. And on the face of it, it’s hard not to ask the question. Despite the annoying secrecy that Microsoft maintains about the revenues of its Dynamics products, it’s pretty obvious that the original goal of “10 years and $10 billion” in revenues is off by something resembling an order of magnitude.

And yet, the two-day analyst summit hosted by Microsoft just before Thanksgiving week made it abundantly clear that Dynamics isn’t a so-so success for Microsoft: the company’s enterprise software portfolio, in particular AX and CRM, has become the lodestar for virtually every important piece of technology produced across Microsoft’s vast technology empire.

More importantly, Dynamics is increasingly the place where the cross-company synergies that have eluded this famously siloed company are now becoming reality. And those emerging synergies bring with them the potential to dramatically alter Microsoft’s overall competitive profile in the enterprise and that critical point of convergence between the enterprise and the consumer that very few companies, Microsoft being perhaps the most advanced, are in a position to truly take advantage of.

The idea of the Dynamics lodestar came to me about one hour into the analyst briefings, when Dynamics exec Michael Park, in an off-hand remark, referred to some forthcoming capability in Windows 8 that would significantly improve Microsoft’s mobile enterprise offerings, as though we Dynamics followers already knew all about it (which many of us we didn’t, highlighting the fact that covering enterprise software, whether it’s from Microsoft, Oracle, Salesforce, IBM, HP, or SAP, is more and more an exercise in covering everything that Microsoft does.)

Kirill Tartarinov, the head of the Dynamics group, had already mentioned Windows 8, as well as Kinect as a user interface device for the enterprise, in his opening remarks, and we were soon to hear one of the first mentions of Skype in a Microsoft briefing since the deal was finalized, also in the context of enterprise functionality.  As the morning wore on the list of Microsoft products that were being woven into the company’s enterprise software strategy grew to become nothing less than a what’s what of virtually the entire Microsoft top-tier  technology palette.

Here’s a list I compiled during the day of the different pieces of the Microsoft product set that are finding some of their most important use cases alongside Microsoft Dynamics:

• Azure and the cloud, including Office 365
• SQL Server
• Visual Studio and .NET
• Windows 8, especially mobile
• Kinect
• Lync and Skype
• Business Intelligence
• Sharepoint
• Bing

I’m not even sure that covers all the possible products and synergies, but it’s a good start. When you weave these different offerings into AX and Dynamics CRM in particular, the result is an impressive array of new and innovative functionality that gives Microsoft a strong standing in the enterprise. In a separate post I’ll highlight some of the synergies between Dynamics and the rest of the Microsoft portfolio, suffice to say for now that combining these assets and making them core parts of the overall Microsoft enterprise offering makes for an impressive portfolio.

What’s also impressive is how these capabilities sync up with the Dynamics’ plans to harness a direct sales force and consulting team in order to take on the large enterprise market. This is, of course, absolutely essential for tackling the large enterprise market. Without having some degree of direct responsibility for project success – either as a prime, or more likely, as a sub-contractor – Microsoft can’t hope to compete in this space against SAP and Oracle.

With this direct sales-plus-services team now ramping up, Microsoft will have some great assets to bring to the large enterprise table:  A portfolio of well-integrated products that support traditional ERP and DBMS functionality, as well as on-demand/SaaS CRM, mobility, cloud-computing, new user experiences like full-motion gesture control (Kinect), integrated communications, collaboration, analytics, search and mapping, office productivity, and applications development . As many of these products are already market leaders in their respective domains, the new Dynamics direct sales and services team is starting from a definite position of strengths.

The result is that Microsoft will soon become a factor in the large enterprise market in ways that could seriously realign the market in coming years. And that’s before we get to the consumer/enterprise bridge that Microsoft can now form.

This consumer/enterprise opportunity is one that Microsoft has a distinct advantage in realizing. Only Hewlett-Packard has an equally impressive position in both sides of this opportunity, now that it has chosen to keep the PC group in-house. Apple is coming in quickly on the heels of the iPad and iPhone, and Google, if it could ever figure out how to deal with security and enterprise-class service, may one day break out of its consumerist focus and make a real play for the enterprise. But all the other erstwhile Microsoft competitors – IBM, Oracle, SAP, Salesforce.com, and many others – have no legitimate presence in the consumer side of the market.

This leaves Microsoft with a pretty big runway for dominating this convergence. Assuming it can keep up with a consumer tech market that is looking for Facebook like social connectivity and Amazon-like simplicity, in an iPad-like user experience – and that’s not a small assumption, though Bing, Kinect, and Windows 8 should help in that regard – Microsoft could emerge as the essential marriage broker between the enterprise and the consumer in a way that will be the envy of the market.

For now, this  position is aspirational, and it may take at least two years before we can judge how well the Dynamics direct sales effort is working and how well the synergies between the larger Microsoft portfolio are productized and brought  to market. But in terms of potential energy, Microsoft Dynamics is an up and coming market leader.

They may have missed the goal of $10 billion in the first ten years, but I would expect that it won’t take them anywhere near ten years to reach that goal now.  And that’s not including what Dynamics should be able to do to boost the revenues of the rest of Microsoft’s business units.  Playing the role of proving ground for new technology, particularly in the high-margin enterprise space, isn’t just good for Dynamics, it’s good for Microsoft too.